Global equities hit fresh lows this week as the bear market continues and extends a disappointing year. Of course, many investors are frustrated, which is understandable. But frustration often creates an urge to act — to do something, anything can feel like regaining control in an uncomfortable situation. Yet so long in a bear market, such urges can easily be dangerously counterproductive. As challenging as this year has been, we think reacting to the past is arguably the greatest risk investors can take right now.
If the past two weeks have been feeling like a bad deja vu, your intuition isn’t far off. This year has been a rollercoaster ride for global equities. After a bumpy spring, world equities crossed -20% for the first time on June 13th – the threshold for bear markets (usually sustained and fundamentally driven declines). Days later, on June 17, the MSCI World started to rally. But after two months, the summer rally ebbed and earlier this week, global equities hit new lows –15.3% since August 16 and -25.1% since the January 4 peak.[i]
Figure 1: A challenging time for global equities
Source: FactSet as of 9/27/2022. Returns of the MSCI World Index with net dividends, 09/30/2021 – 09/27/2022.
Persistent bear markets are frustrating and challenging, but it’s important to remember that investors who want long-term, equity-like returns don’t need to avoid bear markets to achieve that goal. Now, when you identify a huge multi-trillion dollar downside that the markets have not yet weighed, reducing equity exposure may make sense. However, we didn’t see this bear market forming soon enough to encourage readers to take action. It’s humiliating, but it doesn’t change what we now think is the wisest course of action.
Without early identification of the bear market and taking action, we suggest going back to basics. yes we know “Patience,” “stick with it,” and the like may sound like tired mantras—but that doesn’t make them unwise. Sometimes the things you don’t want to hear are still right, important, and smart. Here are a few such concepts: First, don’t exit stocks because of what has already happened. Sell losses now and if you are out of the market when a rally begins it will be much more difficult to recover those losses. You might then be fighting like and opposite emotions that you want to get out of the way to mitigate potential declines. It’s a recipe for potentially missing out on a recovery. Again, avoiding negativity isn’t strictly necessary to achieve the long-term returns of the markets. The S&P 500’s 10.3% annualized average return includes all bear markets from 1926 through 2021.[ii] If you’re aiming for growth that matches stocks’ long-term results, we believe delivering market-like returns is crucial.
Also crucial: making investment decisions based on the future as markets are forward-looking. With stock prices floating most of the way between expectations and reality, you should consider how sentiment aligns with economic and political fundamentals. According to our observations, the mood today is extremely depressed. Investor and consumer surveys are showing rampant pessimism, as is business activity. For example, the IPO market is experiencing its slowest year in more than a decade and merger and acquisition (M&A) activity has stalled, with dealmakers blaming higher costs and fears of an economic slowdown.[iii]
We are by no means saying that things are uniformly positive. We also do not rule out headwinds, particularly from elevated inflation and high energy costs, which could very well stifle growth in parts of the global economy. But we’re also seeing signs that the reality isn’t as bad as many think. Take the New York Federal Reserve’s Global Supply Chain Pressure Index. While still at historically high levels, it has been trending down over the past four months – suggesting that pressure on global supply chains, one of the biggest concerns of 2022, has eased.[iv] Fisher Investments Executive Chairman and Founder, Ken Fisher, recently provided a comprehensive overview of other sources of reduced price pressures, ranging from slowing monetary growth to smaller fiscal deficits to falling commodity prices – take a look RealClearMarkets. Politics should also provide tailwinds as we head into the fourth quarter – with the US midterm elections a big source of falling uncertainty – and into 2023. While it’s just one factor, it’s worth weighing for investors. After all, it’s not uncommon in bear markets for markets to retest lows, and it doesn’t mean that further downside automatically awaits them before a rally, as previous returns never predicted. And therein lies the key problem many investors wrestle with today: Emotions are shaped and colored by the recent past, but that doesn’t help predict what lies ahead.
[i] Source: FactSet as of 09/28/2022. MSCI World Index returns with net dividends, 16/08/2022 – 27/09/2022 and 04/01/2022 – 27/09/2022.
[ii] Source: Global financial data as of 03/28/2022. S&P 500 Total Return Index, 12/31/1925 – 12/31/2021.
[iii] “IPO stocks have collapsed, hampering demand for new listings,” says Corrie Driebusch, The Wall Street Journal9/26/2022 and “Season of Shelved M&A tops $150 billion as credit woes bite,” Manuel Baigorri and Ben Scent, Bloomberg08/26/2022.
[iv] Source: Federal Reserve Bank of New York, Global Supply Chain Pressure Index, https://www.newyorkfed.org/research/gscpi.html, as of 09/27/2022.